Private Sector Reform 2020

WARNING:  This reform is contained in the Draft Finance Bill 2019, which is subject to Consultation, ending on 5 September 2019.  Confirmation of the final design of reform will be given by government at Budget 2019. 

 

The following documents were published on 11 July 2019:

Rules for Off-Payroll working from April 2020

Rules for Off-Payroll working from April 2020 – Draft Legislation

Rules for Off-Payroll working from April 2020 – Explanatory Note

HM Treasury Factsheet

 

Brief History of IR35 (also known as the Off-Payroll Working Rules):

  • IR35 began in April 2000.
  • IR35 was reformed for the public sector from April 2017.
  • IR35 is to be reformed for the private sector with some changes to the public sector reform from April 2020.

Since the advent of IR35 in April 2000 the responsibility for deciding if IR35 applies rests with the contractor and still does for those in the private sector.  This changed for those in the Public Sector in April 2017.  The change basically meant that where a contractor is providing services to a public authority (defined by any public body subject to the Freedom of Information Act) then the IR35 decision is made by the public authority – not the contractor.  If an inside IR35 assessment is made by the public body the “fee payer” – the authority or usually the agency – has to deduct and account for the “deemed employment income” and pay over to HMRC the appropriate tax and NIC.

See About IR35 / Off-Payroll Working Rules for further information.

 

What are the proposed changes for the private sector?

Essentially the proposed rules are similar to those already in the public sector with end clients making the IR35 decision and fee payers responsible for making the deductions.  In brief these are as follows:

  • Affects medium and large businesses only – small companies remain exempt.
  • Small incorporated clients are defined as: Annual Turnover of not more than £10.2 million, Balance sheet total not more than £5.1 million and number of employees not more than 50.
  • Small unincorporated clients are defined as: Annual Turnover for a calendar year only of less than £10.2 million – no other tests.
  • Status determination statements (SDS) – legislation to enable the SDS and reasons for it to be passed down the supply chain and directly to the worker.
  • Client led status disagreement process to be set in legislation together with the need to take “reasonable care.”
  • Non-compliance in the supply chain – further guidance to be provided on the circumstances when HMRC will transfer liability up the chain. Seen as an encouragement to secure the compliance of the supply chain – more risk for end clients.
  • Fee- payer liable for secondary (employers) NIC.

We are promised a lot of further information and guidance from HMRC and this includes amendments to the HMRC CEST (Check employment status for tax) tool.  HMRC are already writing to businesses about preparation for these reforms.

 

Things to consider prior to the new rules:

Contractors

Contracts are likely to start to overlap with the new rules.  It is vital that contractors consider having their contracts and working practices properly reviewed now.  End client evidence should also be sought, to enable those outside IR35 to transition smoothly to the same position in April 2020.  Contractors should also be alert to the fact that their contracts are likely to be re-drafted ahead of the reform.  Once the reform bites it is likely that some may find their IR35 status changed to inside IR35 and although this would not make them liable from April 2020 there is a real risk of a retrospective tax/NIC claim by HMRC.

Agencies and end clients/hirers

Now is the time to check supply chains for compliance, which includes any arrangements involving third parties undertaking IR35 contract reviews and offering IR35 advice.  On the latter it is vital to ensure that such third parties are not Managed Service Company Providers, which in itself, would pose an enormous financial risk.

Consultancies

Genuine outsourced services are outside the rules for both the public and private sectors and some consultancies working on genuine Statement of Work contracts (the basics are – where the supply is of services and not people and payment is not on a time and materials basis) are also outside the rules.  However, these arrangements need to be scrutinised to ensure this is the true situation and evidence of same sought and kept, including all the contracts in the chain.

Even if outside the rules on this basis it is likely (unless a small business) that the rules will still apply and the Consultancy effectively becomes the client, so will have to make the status decision.

All parties need to properly understand who they are dealing with and on exactly what contractual basis, as well as establishing the reality.

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